The second half of 2020 offers clues to where 2021 is heading

We expect 2021 to be very different to 2020. The pandemic resulted in a crash in demand, followed by a capacity crunch, which will make year-over-year comparisons difficult. We don’t have any non-pandemic years in recent enough history to make meaningful comparisons.

The last time we faced this dilemma was in 2019 when attempting to compare industry metrics to 2018, which was also an unprecedented year in different ways. After category 5 hurricanes in late 2017 devastated the South, 2018 started with massive rebuilding efforts. Changes in the corporate tax code, which stimulated spending in the industrial economy, also drove up demand for flatbeds. The price of oil rallied, creating a lot of activity in fracking freight, including things like drill pipe and related oilfield materials. 

Capacity in 2018 was characterized as the tightest in a decade, with spot rates higher than contract rates for part of the year. In 2019, none of those market forces existed, making 2017 the next closest year for comparison. What do we need to do in 2021?

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Comparing the second half of 2020 to the first half of 2021 may yield some value this time around, so let’s look at a couple of trends that are emerging to get a feel for where the freight market is headed.

Warehouse capacity

“Consumers’ behavioral shift to more e-commerce will likely manifest in increasingly tight warehouse capacity,” according to the latest Logistics Managers Index (LMI) report. Indeed, there is still contraction in this space. It appears, though, as the tensions of the holiday season ease, more capacity is being brought back online. 

If this continues, warehousing capacity may rebound to more normal levels seen in the pre-pandemic landscape. “There is not enough warehouse space coming online to store goods close to consumers, which means everyone is looking for the same warehouses in more expensive urban areas,” according to Zac Rogers, Assistant Professor at Colorado State University.

Strip malls to distribution centers

One of the trends we’ve been following is the conversion of vacant strip malls to distribution and/or e-commerce fulfillment centers. If warehouse capacity close to consumers remains tight, and more strip malls add more capacity in heavily populated urban areas, does that mean the length of haul for truckload carriers gets longer as intermediate warehouses are eliminated? 

It sounds logical and certainly offers a lot more truckload parking capacity around strip malls, but sending 53-foot trailers into urban areas in heavy traffic may add more transit time into the supply chain, not less.
To test this theory, DAT spoke to industry expert Daniel Stanton, who’s better known as “Mr. Supply Chain” in the industry. Mr. Stanton thinks there is definitely going to be some reshuffling of distribution networks, driven by a combination of long-term behavioral impacts of COVID and an acceleration of e-commerce. 

“I am not convinced that strip malls being converted to distribution centers is really a logical long-term play,” Stanton said. “The layouts are wrong, the locations are wrong, and the whole thing just seems very ‘duct tape and bailing wire’ to me.” 

The rationale behind this thinking lies in the hub and spoke design of truckload freight networks. “If you move the hubs out of industrial parks and into strip malls, then you are going to end up with a lot more transit time and variability due to city traffic,” Stanton contends. He sees strip malls as "cross docks between a distribution center located in a local industrial park, and the customers in an urban community.”

In 2020, DAT observed record levels of new spot rates on new lanes, as shippers rushed to move freight to emerging markets driven by the consumer shift from bricks and mortar to online purchasing. Stanton does not think there will be a big impact on the truckload sector with the addition of strip malls as distribution centers but does think it “pours gasoline on the growth of local milk-runs with small box trucks and sprinter vans.”

The current consensus is that truckload length of haul could shorten as a result and make truckload even more regionalized than ever before.

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Dean Croke

Dean Croke is principal analyst for DAT iQ, the freight data and analytics operation at DAT. He brings 35 years of experience in the fields of data science, supply chain management, logistics, risk management and human performance. For the latest market updates, follow @LoadBoards on Twitter.